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Saturday, 26 July 2014

Luckily for me I don't have to plan my retirement from the angle of "how long will my money last". I have an index-linked BD pension that, although modest, when combined with my husband's pension (also DB), state pension and flat rental, is enough to live on and will last as long as I do.

I feel very fortunate because the prospect of running "pension pot" figures through financial modelling software, and feeling confident enough about the results to be able to make firm decisions based on them, is daunting. Especially when you remember that sticking to the "safe side" and over-funding might very well leave you with a surplus that has cost you precious years of freedom, only to remain unspent because you died before the last row on your spreadsheet.

However, despite the fact that I don't need to use this kind of tool "in anger" I was interested to see how the modelling worked so I took a look at Firecalc which is one of the calculators widely recommended for the job. What surprised me most of all is that there doesn't seem to be a UK version so the figures you enter have all to be converted to $s. Also all the data that the calculations are based on is taken from the American markets. However it maybe just that my Google searches just didn't turn up the right results. I was looking for a direct UK equivalent to Firecalc but it is quite likely that a similar type of "Monte Carlo" simulating process is used by many of the other calculators on the market. More investigation needed.

Firecalc works by running your living costs, portfolio value and life expectancy through a series of calculations and gives you a % likelihood of "success" which has been assessed based on how the markets have performed in the past."FIRECalc shows you the results of every starting point, since 1871. You can get a sense of just how safe or risky your retirement plan is, based on how it would have withstood every market condition we have ever faced."I ran my figures through it and this is the result:

FIRECalc Results

Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved.

Because you indicated a future retirement date (2019), the withdrawals won't start until that year. Your contributions will continue until then. The tested period is 5 years of preretirement plus 32 years of retirement, or 37 years.

FIRECalc looked at the 107 possible 37 year periods in the available data, starting with a portfolio of $212,206 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 107 cycles. The lowest and highest portfolio balance throughout your retirement was $212,206 to $2,932,303, with an average of $1,054,551. (Note: values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 37 years. FIRECalc found that 0 cycles failed, for a success rate of 100.0%.

Understanding the charts below: Don't try to follow any individual line -- with most scenarios, there are just too many of them. But if you look at the mass of lines, and the zero axis, you can get a clear visual representation of how frequently your strategy would have failed (dropped below zero) or succeeded. The objective of presenting the information this way is to allow you to get a "big picture" sense of the way your strategy would have performed historically.

Year-by-Year Portfolio Balances

The zero line is shown in red.

What my results mean

Predictably the success rate is 100%. However, what is interesting is the vast difference between the highest and lowest potential value of my portfolio - £1,727,271 down to £125,000. This is food for thought, as it seems that there is every chance I could have a substantial amount of savings left that won't be needed to live on in retirement.

I did sort of know this because the period of time I am trying to fund at the moment comes before our pensions kick in, not after. Despite knowing this I have felt reluctant to stop pumping up the ISAs as much as we can. However, it might be better to review this and investigate putting more in my private pension now to help us both retire another year earlier? However I'm not sure what the impact of not working for a further year would have on my LGPS pension so I need to work this out.

Two additional points to Note:

I need to start to think about how we want to manage inheritance - How much to leave (or gift before we die?).

Do we need to put something in place to manage potential care costs? Should we earmark some (or all) of the ISA fund for this? What is the best way to manage this?

Monday, 14 July 2014

The standard advice to novice investors like me is "Don't keep checking what your investments are worth, turn off the portfolio tracker". The reasons for this are pretty obvious - the markets are inherently volatile and humans are inherently "easily spooked" (or most of us are).

So, according to Prospect Theory (people tend to be influenced more by the "prospect" of an investment - i.e. whether it is rising or falling than its actual value), I should be starting to feeling the fear and itching to do something about it. However, because I know that red in a portfolio tracker is inevitable due to the way the markets work, I'm happily keeping irrationality at bay.

Personally I don't believe that the way to deal with volatility is to pretend it doesn't happen and refuse to see it. Ignorance is not bliss as far as my investments go. I used that tactic for years and I'm sure their value suffered because of it. But the key here is "informed" involvement.

Knowledge of how things work does help to damp down our inbuilt emotional reaction to risk. I know that flying is statistically very safe, planes do not fall out of the sky (or do so very rarely). They are engineered so that this is virtually impossible and pilots are highly trained, skilled individuals. In the same way markets tend to recover and continue to rise, and periodic set backs are part of this process. Rationality insists that we sit tight when the markets drop, buy whilst prices are low and wait.

However, if the red figure on my whole portfolio reaches double digits and stays there for a while, which, my reading tells me it mostly likely will at some point, it might be more of an effort to keep my nerves steady.

I have a strategy for dealing with my nerves when a flight becomes a little bumpy and it involves several stiff gin and tonics. I'm not sure that this is quite what financial experts have in mind when they advise how best to deal with stock market turbulence by saying "chose a strategy and stick to it."

Thursday, 10 July 2014

I am a member of Unison which is one of the Unions whose members are currently in dispute with the government about the so called “austerity” cuts to public services, and to the pay, conditions and pensions of public sector workers.

Trade Unionism is in my blood and yes, I get emotional about it. I’m not ashamed of that, but I am ashamed to live in a country where the public services that form the bedrock of a civilized society are being degraded in the way this current government seems to have no shame in doing, along with freezing the pay of those who work hard to try to continue to deliver them.

Although I support the aims of the strike from the bottom of my heart, what I feel even more strongly about is the danger to the whole trade union movement that this current dispute has highlighted. The Tories have now announced that they want to cut the unions down completely and effectively leave workers without a negotiating function at all. To achieve this they are aiming to bring in legislation that will remove the right to strike unless it has a mandate which exceeds the one on which many MPs themselves were elected. And this is democracy? It makes me want to weep.

If you have no collective bargaining you have no means of negotiating, you are reduced to begging. This is what a government that aims to cripple the unions should remember. Do they really want to promote the imbalance in power that this would cause. The IMF has something to say on this which the current government would do well to heed.

As for me, today’s action left me feeling uplifted. There are a lot of people out there who feel frustration at the way public services are being cynically attacked under the guise of dealing with the “deficit”. I don’t know if we can change anything, but at least we are trying, and we are being heard. Collective withdrawal of labour is the last resort and it isn’t done lightly, but feelings are strong because those of us who work in the public sector see first hand the damage that the cuts to services is causing.

Saturday, 5 July 2014

I received a secure message from Interactive Investor 10 days ago telling me that my ISA transfer would be showing in my account in 3 days time. Despite several phone calls my funds still haven't arrived, although I am assured that this is just due to a backlog and they will be with me very shortly.

I know (from reading the numerous posts on the subject on moneysavingexpert.com) that all the platforms are struggling with the volume of transfers at the moment. II is one of the better value flat rate services and so I appreciate that it is probably struggling more than most. I am (and I have been) prepared to wait but it is quite disconcerting to get an automated mail saying that your transfer is finalised, hold onto your hat, you'll be able to trade very soon, and then..... nothing.

However, in the meantime, I thought I should some concrete plans about what I'm actually going to do when the magic moment finally arrives.

My transfer will consist mainly of the CIS UK Growth Fund (around £40,000 on a good day) and a tiny bit of the CIS US Equities Fund (£70 - somehow a bit got left behind when I sold most of it a few years ago).

Due to the UK fund being by far my biggest holding my portfolio is very top-heavy in UK equities and I know that I need to rebalance. However I do need to watch out for dealing charges. Interactive Investor charge £10 per buy/sell but I will be credited with a total of £50 credit plus £20 cash when the transfer completes due to the quarterly credit plus transfer offer. So I will have £70 to spend over the next 3 months which also needs to cover 3 lots of monthly investments at £1.50 per line.

My first priority is to sell a good chunk of the CIS UK fund - I'm was thinking that I would sell £10,000 and redistribute it into my trackers as a start. So something like £3,000 into BlackRock Emerging Markets, £3,000 into HSBC FTSE 250 and £4,000 into HSBC European Tracker. Well at least this was my intention until I saw this:

(Telegraph 26 Oct 2013 - Dan Hyde)
This article has made me question my plans because it seems that (if the analysis is to be trusted) the areas in which I have already bought trackers are actually the areas where, if I'm going to use active funds at all, I should be using them. It seems that somehow I may have got it completely the wrong way round. Until you look at the effect of the fees of course :-)

One thing I can be clear on is that I do need to put a fair bit of money into the US as I have very little exposure to the US markets at the moment (around 4%). But this is such an expensive area as the S&P is soaring. I would be buying very high.

Perhaps a global tracker would be a better idea that a US specific fund at this point in time (I do also have an ex-UK tracker in my AVC fund). In this way I cover both the US and Europe and can beef up either/both when the markets fall a little. So I've decided to make the following buys:

Vanguard Developed World ex-UK tracker - £5,000

I'm inclined to continue to cover Emerging markets with a mixture of active and passive

BlackRock EM CIF - £1500

Aberdeen Asian Smaller Companies - £1000

Europe is a bit of a biggie as I have very little invested here and according to the chart this is the one area where low cost active management (if you can find it) can really pay off. So my fourth buy will be a European investment trust (possibly property based) although I haven't done enough research to know which one as yet.

European IT (tbc) - £1500.

This leaves me with £1000 to add to my regular £500 contribution this month and I so will invest £300 in each of the following:

Thursday, 3 July 2014

A lot has been written in recent months about "transparency" in investing, most of which has been in reference to charges.

However, as I see it, there is another way in which the concept of "transparency" should be applied from the investors point of view, and that is in regards to the way in which we are expected to accept a "Storage Hunters" - type deal when we buy funds. (For anyone who is not a regular Dave viewer "Storage Hunters" is an American programme based on the auctioning of the contents of storage lock-ups virtually "sight unseen." The buyers get a quick glimpse of what is inside but then they bid on "gut feeling" and instinct as to its actual value, egged on by the "auctioneer". As Reality TV goes it is probably one of the most manufactured examples , but also a little addictive. (Not that I've seen more than a couple of episodes for research purposes, of course :-))

When we buy an actively managed fund we are usually limited to the "Investment Objectives" mission-statement plus a list of the top ten holdings on which to base our decision, with historical fund and fund manager performance statistics added into the mix. Full listings of fund holdings are usually available at periodic intervals, but they are not widely published and are not easily accessible, particularly to investors who have not already "bought into" the fund in question. What the average investor has to go on is little more than Brandon and Lori have as they peek into the next container and speculate as to what is under the sheets.

However Neil Woodford has been in the news recently (yet again) as he has promised to disclose his entire portfolio and make it easily accessible to all. Perhaps this means that there will be a sea-change towards transparency from fund managers. It does seem to be a move in the right direction as a "sheets off" approach in all aspects of the finance industry can only be good for investors who want to be able to make informed decisions.

After all , we do need to be able to see exactly what we are putting into our pots in order to be able gauge its effect on the mix. and "sight unseen" should perhaps be one investment risk we could be avoiding.